August 27, 2007 12:37 PM PDT

Acer seizes opening with Gateway

Acer needs help getting ahead, and Gateway needs help keeping up. Both hope a merger will do the trick.

The Taiwanese PC maker announced Monday that it would purchase Irvine, Calif.-based Gateway for $710 million, or $1.90 per share.

It's not completely unexpected. Acer said earlier this year it was in the market for a smaller PC company, and intended to pass Lenovo as the world's third-largest PC company. This deal should do just that. The two companies combined shipped 18.6 million units and covered 8.1 percent of the worldwide PC market, according to research firm IDC. That would put Acer behind Hewlett-Packard and Dell, and squarely ahead of Lenovo.

"We're at a state where this makes sense. The PC market is a mature market, and consolidation is the way these companies are going to get to fast growth," said Richard Shim, an analyst with IDC.

"Fast growth" is the name of Acer's game. It's been the world's fastest-growing PC maker for the past three years in a row. In 2006, the company's shipments grew by almost 40 percent.

For Acer, the acquisition is also about grabbing a larger chunk of the U.S. market. Despite its swift rise to the top tier of PC makers in units shipped, it's been more difficult for the company to get its notebooks on retail shelves. And Gateway has floundered for several years, so the deal seems to make sense for both companies.

But will it work? Acquiring a struggling PC maker has historically been a difficult thing to do, particularly given the low margins in the market. "One example that has been successful has been HP's acquisition of Compaq. But that took three years to come to fruition," said Gartner analyst Charles Smulders. "I think, in this case, Gateway has gone through a period of cutting costs so it's a very streamlined organization, which should make integration an easier process."

Gateway, of course, needs the help. The company has struggled in the highly competitive notebook market. Though its retail presence was initially successful, staying competitive with price reductions led by HP and Toshiba in the midprice notebook market is difficult. The company hasn't had better luck on the retail desktop side.

"The Gateway brand had been strongly positioned as a midpriced brand at retail. eMachines has been branded at an entry-level price point, but it's struggled in the last year as consumers have been replacing entry-level desktops with entry-level notebook purchases," said Stephen Baker, vice president of industry analysis at NPD Group.

Acer should benefit immediately from Gateway's strong brand-name recognition in the U.S. Longer term, Gateway brings to Acer its established relationships with retailers. Acer said it plans to keep the Gateway brand in the United States, which could help it wield a two-pronged brand strategy in the same way as HP has done with Compaq.

Gateway already has a two-brand strategy, with Gateway positioned in the midlevel price range and eMachines as its entry-level brand, after acquiring the small company in 2004. But analysts seem split on whether Acer will keep the eMachines brand.

In the low-end desktop market, the Acer and eMachines brands are pitted directly against one another, which could mean doing away with the eMachines name, Baker said. However, eMachines has been positioned for retail and Gateway for direct sales, Shim pointed out. Gartner's Smulders expects Acer to divest the combined company from the professional segment of the business and focus squarely on retail.

Either way, Acer will need to identify the key strengths of the Gateway brand and clearly communicate those to buyers. Though Gateway is a known name--and has that recognizable cow-print logo--what exactly the name means to customers is hazy.

"Very few understand what it stands for," Smulders said. "They need to establish what the focus of the brand really is, whether it's great service and support, whether it's leading technology or the center of your digital home. (Acer) has to find ways to differentiate the brand and stand out from the rest of the pack."

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PC company, eMachines Inc., Gateway Inc., Acer Inc., Richard Shim

9 comments

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Could be interesting. It's not a merger of weak companies.
Acer has been growing. It will be interesting to see if they can rejuvenate Gateway and eMachines.
Posted by lingsun (482 comments )
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What I think of my gateway
It's a gateway notebook purchased last year. I'm happy with it. The hardware specs .vs. price was similar to other makers if not slightly favorable for the class it was in. It was on sale at the time which did give it an edge on price. My two main reasons for choosing it (what made it different to me from the others):

1. It was not loaded with crapware. What I saved on price, I used to paid the extra for XP professional on it (for me a need) so I'm not sure if the multimedia edition would have been different. It did come with Office Professional, DVD playing software, CD burning software, an app to help schedule backups or restore, but not much else. Overall, good job on app choices for me and not loaded garbage I didn't want.

2. It came with a restore DVD. Many of the computer makers are dropping the inclusion of this useful item. If you purchase a computer that doesn't come this way, see if you can get it for a small charge (usually around $10). It's worth having. From past experience, this disk is well worth having.

Perhaps these two reasons are not high on your priority list, but that's fine. I'm just letting you know the deciding factor for me and that I haven't had any issues with mine. Do your own comparisons, and look at what's important to you... price/performance/quality... then make your own choice. All I ask is you atleast consider it before making your choice.
Posted by Seaspray0 (9714 comments )
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I totally agree Gateway Is the The Best and In my opinion will always be the best!
Posted by thomasboy234 (8 comments )
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Why Gateway utimately failed
I own two Gateway computers, both several years old. They're still in service. An associate of mine is using his fifth or sixth Gateway. Quality components are one of the reasons for Gateway's early success. If you had a problem, which didn't happen very often, it was taken care of immediately. That changed dramtically after the companies downturn. Their customer service and tech support went completely south.

A couple of years ago, the machine still well under warranty, I called Gateway for a replacement floppy drive. and was told that I would need to format the hard drive and reinstall Windows to "prove" to them that my floppy drive was defective. Needless to say, I protested such a radical step for a low level issue.

I later called their corporate offices to discuss this (and other) customer service/tech support issues. I was flatly told that the Vice President of Customer Support did not speak with customers.

Bzzzt! Wrong answer. I very slowly and carefully told the person on the phone to please give the VP a message for me.

"I will no longer purchase or recommend Gateway products to anyone. I make purchase decisions and recommendations on a daily basis, and a company that cannot or will not speak to a loyal customer no longer deserves that loyalty or respect. I will, from now on purchase and recommend Dell".

I really expected a call from someone, but it never came. So apparently, I was right.

Gateway was once a great company, that helped make the PC industry great. Soon, they will be a footnote in the history of computing, and they did it to themselves.
Posted by skerns (4 comments )
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agree
i totally agree with skerns article. dell is a much better machine anyway. gateway like you say will end up quote "being a footnote in the history of computers". they are done for.
Posted by gghartman (2 comments )
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I am Currently Using A Gateway operating system and within a year your opinion will be Vice Versa.You will one day learn a good computer Gateway and Acer are the best.My friend has been through two Dells and a friends of my aunt's can't even use his anymore.
Posted by thomasboy234 (8 comments )
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eMachines
eMachines has ALWAYS been known as a brand to stay away from.
Posted by cedaredge (257 comments )
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Only the beginning
Gobble up the small guys and increase market share. The next logical move will be for Lenova and Acer to merge, creating a dominant global PC company. With the highest growth expected to come from markets outside of US, especially Asia, I think this would be a move that hastens further weakening of Dell.
Posted by oxtail01 (308 comments )
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I have owned several Gateway Computers and they have been great!! I would never buy anything except a Gateway.
Posted by msonieda (1 comment )
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